When considering global financial markets and currencies, the us dollar is certainly a major contender for the top spot when selecting the right currency pairs for Forex trading.
As one of the world’s largest economies, watching how it performs and keeping up to date with the latest news can also give worthwhile insights into the way markets are likely to move and overall financial sentiment, but what is the US dollar’s overall impact on Forex trading?
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Table of Contents show
the us dollar’s relationship with forex
the usd’s role in the wider global economy
usd strength forecasts for 2023
forex trading in 2023
The US Dollar’s Relationship With Forex
Internationally, the usd is extremely strong and acts as a key indicator for investment and trading vehicles of all types. It is often seen dominating a host of markets and leading the way for global financial speculation, but it also plays a vital role on the foreign exchange.
When considering the fact that the US dollar was one half of around 90% of all currency pairings for global transactions – and therefore being the most traded currency on the Forex market in december 2022 – it is clear to see that it will take a lot for other currencies to even rival its impact on the niche as a whole.
Just two months before this figure was released, global currency trading saw an unprecedented surge, causing market value to reach an astounding 7.5 trillion a day .
One of the main considerations for its role is that it is not only widely traded and used for financial gain in terms of global economical factors, but it’s also used as the vehicle currency for non-US tender that can’t typically be traded directly. This increases the number of dollars involved in transactions and ensures that financial markets are consistently facilitating trades.
The USD’s Role In The Wider Global Economy
The dollar has been the top global reserve currency since World War II and this lends to its continued strength even in the face of economic uncertainty. It has the unique ability to act as a financial refuge when markets see a drop, often gaining in strength when other currencies begin to flail.
As countries experience changes both internally and externally, this often leads to their currency value fluctuating. This is what Forex traders look for, as shifts in their economy can result in currencies quickly becoming cheaper, or more expensive. As the market returns to normal, a temporarily high-yield currency can then be traded off to make a profit.
Consider the Kuwaiti Dinar – the world’s most valuable currency. If an economic crash ever took place in Kuwait, the currency’s value would decrease before an inevitable increase, making this transition period ideal for traders to cash in with a purchase, followed by a sale.
The US dollar is one of the only currencies to be supported by a large, consistently strong economy that has diverse global trade capabilities, well-appointed laws and major capital flows. As a result, it has one of the most impactful influences on international shares of global gross domestic product (GDP).
It is also the prevalent currency for international banking protocols, with around 60% of all international and foreign currency liabilities and claims undertaken using the USD. The good news is that the US implements a host of crisis containment efforts to reinforce the overall impact and security of the dollar and this lends to wider market stabilisation.
USD Strength Forecasts For 2023
The strength of the dollar is measured by
the U.S. dollar index
(USDX) and this will collate financial data from other currencies to determine its overall value at any given time. The dollar index will use information taken from the British pound, Euro,…
Read More: The US Dollar’s Impact On Forex Trading